Financial calculations can ease stress of retirement planning

Timothy M. Reese is senior vice president of investments with A.G. Edwards & Sons Inc.

The market volatility we have experienced over the past few years has left many investors wondering when they can retire and how much longer they might have to work in order to save enough to do so.

There are several tools available that that can be helpful in answering these questions

It is important to remember that there isn't one simple formula or calculation that will determine exactly how much a person needs to save for retirement. Everyone's circumstances are unique and there are many variable factors that can only be estimated or assumed when making these calculations.

Some of these factors include salary or annual income, the rate of inflation and interest rates. However, as long as an investor keeps these limitations in mind, the calculations can help give an idea of how much he'll need in total to maintain a standard of living once he retires, as well as how much he'll need to save to get there.

The first step is to determine how much money is needed in the retirement years to maintain an acceptable lifestyle. One rule of thumb used by many financial professionals is the "80 percent rule."

It is more than likely that a person will need 80 percent of his pre-retirement income to cover living expenses during retirement. For example, if a person currently spends $100,000 per year today, he will need to draw approximately $80,000 per year in retirement.

This income can come from a 401(k) or other employer retirement plan, IRAs, Social Security benefits or pensions, as well as other investment savings.

For businesses owners, it is important to determine ahead of time how to turn the value of the business into cash flow (i.e. how to sell the business at retirement time).

But don't forget to factor in expenses that tend to emerge later in life such as rising health care costs and increased travel and recreation expenses.

When pondering retirement plans, a person also should consider the future value of current retirement investments. This calculation takes the amount of money currently saved, plus additional anticipated savings before retirement. This amount is then compounded by an average rate of return over the number of years remaining until retirement.

For example, let's say a person is 30 years old and he currently has $10,000 saved for retirement. He intends to retire at 55 and will contribute an estimated $12,000 per year toward retirement for the next 25 years. Assuming an 8 percent rate of return for that time period, the future value of these investments would be approximately $1,015,938.

It is also important to revisit a savings plan whenever there is a significant life event, such as the birth of a child or marriage. Also, if a person is planning to fund a child's or grandchild's education expenses, he should take that into consideration as well.

These types of events typically change the amount needed to save or invest and, as a result, a person may need to change some of his allocations.

There are ways to help prepare for most of life's uncertainties, and talking with a financial consultant now about retirement will make a person better informed.